Asia's Central Banks Can Do Little About Their Biggest Challenge

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This content was published on February 12, 2018 9:00 PMFeb 12, 2018 - 21:00

(EDITORS NOTE: Image was created using a variable planed lens.) The Bank of Japan (BOJ) headquarters stands in Tokyo, Japan, on Wednesday, Sept. 13, 2017. The BOJ's next monetary policy meeting is scheduled for Sept. 21. The central bank pushed back in July the projected timing for reaching its 2 percent inflation target for the sixth time as economic growth failed to drive price gains.

The issue perplexing Asia’s central bankers: demographics. And making matters worse is the realization there’s very little they can do about it.

“In an aging world, monetary policy is not that effective,” said Amlan Roy, global chief retirement strategist at State Street Global Advisors in London. “Central bankers are over-stretching their boundaries. We need a lot more fiscal policy with structural policies.”

An older population typically means a smaller workforce with fewer taxpayers and prime-age consumers. Potential economic growth rates slide, and inflationary impulses fade as the population grays.

While central bankers can respond with lower benchmark interest rates or even more drastic stimulus such as Kuroda’s unprecedented monetary experiment, that’s merely easing the symptoms. The cure -- dramatic labor-market reforms and increased immigration -- aren’t in the purview of central bankers, meaning governments subject to the whims of voters are forced to do the heavy lifting.

To be sure, Asia as a whole is still younger than Europe and North America, which will retain bigger cohorts of elderly through 2030, United Nations data show. That’s thanks largely to youthful populations of the Philippines, Bangladesh and India. Even still, the 60-and-older contingent will make up about 17 percent of the population across Asia by 2030, approaching the size of the younger-than-15 crowd, according to UN data.

In what’s been dubbed the “Asian century,” the risk is that the continent goes the way of Latin America in the 1990s, failing to make needed changes in employment, taxes, education and health care -- ultimately threatening growth and job creation and aggravating inequality, Roy said.

Here are details from five Asian economies with some of the biggest demographic challenges:

South Korea

Bank of Korea Governor Lee has said the nation’s rate of aging -- the fastest in the world -- will be tougher to manage than its record level of household debt or future Federal Reserve interest-rate increases.

South Korea’s annual economic growth could slow to 1.9% by 2025 and 0.4% over 2026-2035 if steps aren’t taken to increase productivity and labor-force participation, according to Bank of Korea research published in 2017.

Central bank research on countering aging emphasizes tools that it doesn’t control; it says the policy priority should be raising the birth rate.

Thailand

In 2022, Thailand will be the first developing country to become an “aged society," in which at least 14 percent of the population will be at least 65 years old, a Bank of Thailand report noted last year, citing World Bank estimates.

Most of the BoT’s policy proposals fall outside its mandate. They include raising the retirement age, supporting reverse mortgages for the elderly, and providing employers incentives to hire workers older than 60.

Almost a third of Thais are still in debt at age 60 and many elderly workers are in low-skilled roles, meaning they will be forced to rely on family members and the government for support, the BoT report said.

Taiwan

Taiwan’s government projected in 2016 that the population would begin shrinking by 2023, and the birth rate has since fallen faster than expected.

Perng Fai-nan, outgoing governor of Taiwan’s central bank, has publicly urged younger people to marry and have more children.

Perng expressed concern that a low birth rate will threaten growth by constricting the labor supply and putting greater pressure on government retirement funds.

Japan

Demographic change is the most significant challenge facing the Japanese economy, Bank of Japan Governor Haruhiko Kuroda said last month in Davos, Switzerland.

Labor-market reform is a key to meeting that challenge, the BOJ says.

Population decline is also a threat to the long-term health of regional banks and the financial system, Deputy Governor Hiroshi Nakaso said in a speech in November.

Fewer workers would mean greater competition among banks, aggravating the stress from reduced net interest income, on which Japanese banks rely disproportionately, the BOJ said in a report released in October.

Singapore

Ravi Menon, managing director of the Monetary Authority of Singapore, said in a speech last month that aging and a low birth rate will force Singapore to make tough economic choices, including on immigration.

Menon warned of a “demographic trilemma” that means Singapore can achieve only two of three things at any one time: zero net immigration, a stable foreign-worker share, and positive labor force growth.

Prime Minister Lee Hsien Loong and other ministers have repeatedly cited rapid aging as a catalyst for labor-market reform. The government has undertaken efforts to re-skill workers, especially older ones, to help them adapt to different sectors.